What’s the single most important piece of advice for the year ahead?
Markets will remain volatile for as long as interest rates remain uncertain. Unless economies move into recession, we believe that central banks will be cautious about cutting rates too quickly in case they inadvertently stoke inflation further.
When markets are unsettled, there is a natural tendency for investors to look towards the apparent greater certainty that cash provides. However, such volatility can result in under-valuations which provide attractive long-term investment opportunities. And, with inflation high, the returns from cash are not as certain, nor as relatively attractive, as they may initially appear.
The world is changing at pace, but for long-term investors the core message remains consistent: stay invested and stay diversified.
How are you approaching cash within portfolios?
Although interest rates have risen, the returns available from other investments vehicles have increased too, providing returns of 6-7% at only marginally greater risk. We have, therefore, been increasing our exposure to these assets within portfolios.
Cash once again offers an investment alternative. However, it’s unlikely to be the answer to meeting long-term financial goals.
How is EQ positioning portfolios for the year ahead?
We have been increasing our investments in funds with a greater focus on companies with consistent and transparent (high quality) income streams and strong balance sheets. Such companies are better able to adapt to higher interest rates and the increased cost of capital, which should be reflected in more robust share prices.
We are also continuing our commitment to various technology sectors, where the underlying businesses are of high quality, with net cash on their balance sheets, and with strong earnings prospects as businesses everywhere seek technological solutions for productively improvement.
In addition, for the first time in a decade, bonds (corporate and government loans) offer compelling returns and so feature prominently in portfolios. As we are not completely out of the inflation woods, we are keeping a bias towards maturities of three years or less in order to minimise the risk. As we look ahead, bond returns form a key contribution to overall portfolio returns.
Will geopolitical events affect investors in 2024?
It is quite clear that the world is more unsettled today than it has been for many years. Importantly, this applies to developed markets (with the root cause of populist politics still unresolved) as well as to emerging markets and, of course, those regions engaged in conflict.
As the US and UK both gear up for elections in 2024, we expect that the personal financial hardship experienced by consumers in recent years will form the political front line, potentially leading to increased political fragmentation. This comes at a time when the global community faces challenges, such as limited access to scarce resources, changing access to the latest technology and the impacts of climate change, to name but a few.
In addition to bouts of short-term volatility, geopolitics could influence the investment outlook more persistently if it affects inflation (from supply chain disruption and commodity price fluctuations, for example) or the trading capabilities of companies and/or sectors through sanctions and trade restrictions.
Where are you finding attractive investment opportunities?
Given the uncertain outlook, we are still attracted to financially healthy companies with consistent and transparent earnings. Recent share price weakness has allowed us to increase our exposure to these traditionally ‘defensive’ companies, ie those less buffeted by short-term political or economic issues. As the 10-20% price premium usually commanded by such companies is not currently reflected in their market valuations, we consider them to be a very attractive buy.
We are also excited by how cheap the shares in small and medium-sized companies have become and this is an active area of research for us. However, we believe that many still need to adjust to the higher interest rate environment and so it may yet be too early to invest. These businesses may well be a key source of investment outperformance as we get closer to a reduction in interest rates, which would ease the pressure upon them.
Although infrastructure assets, relating to renewable energy or the internet for example, have underperformed this year, they remain one of our areas of greatest conviction because, without them, society simply cannot reap their undoubted benefits.
Finally, investment trust share prices represent their best value since the financial crisis, which provides a substantial cushion against possible adversity. We are aware that similar assets have been bought and sold in private transactions at premiums (upward adjustments) to current market prices and so we will continue to watch the market closely.
In a nutshell, what should we expect in 2024?
The fundamental change in 2023 was the increase in interest rates, which made corporate borrowing and capital investment significantly more expensive. 2024 is more likely to concern how well companies adjust to this higher cost, which will present economic and operating challenges for many. We believe there is a risk of slowing economic growth, but we do expect inflationary pressures to gradually recede.
In the coming year, our key focus will remain on balance sheet strength, as well as the persistence and resilience of corporate income. This stable ‘core’ will provide the base from which to seize investment opportunities as and when they arise.
Please remember, this article is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.
